How Do Insurance Companies Make Money

Written by: Nik Ventouris

Last updated:

Insurance companies play a critical role in our lives, offering protection and peace of mind against unforeseen events.

If you are considering a career as an insurance agent, it’s pivotal that you understand the plethora of ways that you can generate a profit in the insurance sector.

In this How Do Insurance Companies Make Money article, we delve deeper into the intricate mechanisms and strategies that help insurance companies generate their income, providing a comprehensive insight into their operations.

Tip: Doing a pre-licensing education course dramatically increases your chance of passing your exam on your first attempt, which can end up saving you both time and money in the long run.

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How to Make Money Selling Insurance

As an insurance agent, there are several strategies that you will need to implement in order to maximize your earnings, such as underwriting, making private investments, and ensuring that you accurately assess risk.

Premiums: The Main Revenue Source

Insurance companies earn most of their money through premiums. This is the amount you pay to the insurance company for coverage.

  • When you buy an insurance policy, you agree to pay a certain amount of money periodically, usually monthly or annually
  • These payments, called premiums, are pooled together by the insurance company.
  • This large pool of funds is then used to cover insurance claims made by policyholders

However, not every policyholder will make a claim, and not every claim will be for the full amount covered. Therefore, insurance companies often collect more in premiums than they pay out in claims.

Investments: Turning Premiums into Profits

Insurance companies don’t just keep your premiums in a safe, waiting for claims to occur. They invest these funds to generate additional income.

  • Once they’ve collected the premiums, insurance companies typically invest this money in different financial markets
  • They might invest in bonds, stocks, or other types of low-risk investments
  • The profits earned from these investments (generally speaking) significantly boost an insurance company’s total revenue

Think of it this way: if you pay a premium of $100 per month, the insurer doesn’t just hold onto that $100. They invest it, and by the end of the year, it might have grown to $110. This additional $10 is profit for the insurance company.

Note: Looking to get licensed as an insurance agent? Have a look at our state-specific insurance licensing guide.

Underwriting: Risk Assessment and Pricing

Underwriting is one of the many ways insurance companies make money. It involves determining the risk associated with providing insurance and pricing policies accordingly.

  • Insurance companies have teams of underwriters who assess each potential policyholder’s risk level
  • If they determine that a person is high risk (i.e., likely to make a claim), they will charge a higher premium
  • This ensures that they collect enough money to cover any claims the person might make, while still making a profit

For instance, a driver with multiple speeding tickets will likely be charged a higher car insurance premium than a driver with a clean record.

Reinsurance: Spreading the Risk

Reinsurance is another strategy many insurance companies use to manage their risk and ensure profitability.

  • Reinsurance involves one insurance company (the ceding company) paying another insurance company (the reinsurer) to take on some of its risk.
  • This way, if a massive claim comes in that the ceding company can’t afford to pay, the reinsurer will step in to cover some of the cost.
  • The ceding company pays the reinsurer premiums, similar to how individuals pay premiums to insurance companies.

By using reinsurance, insurance companies can ensure they don’t go bankrupt when disaster strikes. They also free up more funds to invest and earn more profit

How to Become an Insurance Agent

In order to become an insurance agent, you will need to follow a few simple steps, and then file an official application with your state’s Department of Insurance.

These steps include:

  • Complete a pre-license education course: This is a legal requirement in most states; even where it is not, we recommend completing an education course as this can go a long way in helping you pass on your first attempt. Most online courses are also quite affordable. 
  • Take (and pass) your state’s insurance licensing exam: You will need to pass a specific exam depending on the insurance line that you will want to practice in (e.g., property and casualty, life insurance, etc.). In most states, exams are administered via either Pearson VUE, Prometric, or PSI, all of which offer exam and content outlines (e.g., auto insurance, health insurance and life insurance policies, etc.).
  • Get fingerprinted and/or a background check: Getting some sort of background check is a requirement in all states, although the fees involved can vary. Generally speaking, you should expect to pay anywhere between $50 and $100 in order to complete your background check.
  • File an official application with your state: This is done through your state’s Department of Insurance — also known as the Division of Insurance — and incurs a small processing fee


Doing a pre-licensing education course dramatically increases your chance of passing your exam on your first attempt, which can end up saving you both time and money in the long run. For pre-licensing education, StateRequirement recommends:

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Alternatively, we recommend having a look at our state-specific How to Get Your Insurance License guide.

How Do Insurance Companies Make Money FAQ

Do insurance companies typically make a profit?

Yes, insurance companies typically generate profit. This is achieved through a careful balance of premium collection, the right investments, and efficient risk management, allowing them to pay claims and still make a profit. For more information, have a look at our How Do Insurance Companies Make Money article.

Who generates revenue for an insurance company?

The primary revenue generators for insurance companies are the policyholders. These are the individuals or business entities that pay premiums for insurance coverage, providing the bulk of an insurer’s income. Having said that, it should be noted that most insurance companies then invest insurance premiums earned in order to generate additional revenue (e.g., real estate, stocks, etc.).

How do insurance companies determine how much to charge in a premium?

Insurance companies rely on underwriting to set premiums. In essence, this means that each insurance company takes a risk based approach when assessing individuals’ or entities’ characteristics and statistical data. The higher the perceived risk, the higher the premium will be.
This ensures that premiums are reflective of the risk involved (on a case by case basis), and allows insurers to generate a profit.

What do insurance companies do with the premiums they collect?

Insurance companies invest the premiums they collect. These investments, typically in low-risk financial markets (e.g., real estate, stocks, bonds, etc.) generate additional investment income, supplementing the revenue that they receive from policyholders. Of course, investment income insurance companies will also need to use these premiums to cover their operational costs (e.g., wages, rent, etc.).

How do life insurance companies make money?

Life insurance companies operate with a similar business model to other insurance companies. They collect premium payments and invest that money. They also manage their risk effectively, often charging higher premiums for higher risk individuals to ensure profitability. For more information on how a life insurance company makes money, have a look at our How Do Life Insurance Companies Make Money article.

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